Where to for house prices?

Latest stats confirm that the housing market hasn’t gone anywhere in the lead-up to this year’s Budget.

Now that event is behind us there is plenty of discussion about where to now for house prices.

Certainly the bears have come out of the woods again (even though it is winter) making all sorts of negative predictions ranging from a 5%  fall in house prices right through to 15%.

I’m not going to make any prediction like that – partly because it will mean I’m likely to have to walk the length of the country or apologise for getting it wrong.

Rather it’s worth looking at the factors which drive the market.

The traditional ones that seem to have the most impact are: immigration, interest rates and construction.

House prices are closely correlated to immigration. At the moment it seems immigration is positive and it will remain so for the foreseeable future. Mark this one up as a plus for house prices rising.

Interest rates are on the move. We have hit the bottom of the cycle and the Reserve Bank started its tightening last week. Although banks are yet to move home loan rates it will happen. This is a negative for the housing market.

If you want a positive it is this - home loan rates are not expected to rise as high in this cycle as in previous ones.

Factor three is new construction. Numbers have been down for some time, but there are signs new building is increasing. However not at the rates previously seen.

I hear there aren’t as many builders around now and many who ran their own businesses during the boom time are now working for other builders on wages. This factor is possibly a mild positive for house prices.

Besides the traditional drivers there is one “unique” one at the moment and that is the changes Finance Minister Bill English announced in this year’s Budget.

The changes around deprecation and LAQCs will make property investors evaluate their holdings and in some cases sell.

The majority, who are buy and hold investors, probably won’t be too badly affected and will hold on. However those that are negatively geared and using LAQCs will have to make some decisions.

Many of these properties which have little chance of turning into cash-generating investments in the near future will hit the market.

How many fall into that category are unknown. Some suggest as much as half of the investment property stock could be in this group.

These properties will hit the market but not all at once. They are not likely to be bought by other investors, rather they will become owner occupied. This may be a window of opportunity for first home buyers to get into the market.

The other thing to consider is that many of these properties are in the lower price bands (ie. less than $300,000). It is this part of the market which will suffer. Changes from the Budget are less likely to impact the upper parts of the market.

When people talk about where house prices are heading they should look more closely at different parts of the market rather than talk about it as one big market heading in one direction.